Where to Put Your Money?

“Some of you guys think this shit isn’t serious, but it is. If they don’t get the support package, its over.”

The “uneducated” amongst us (of whom I include myself) aren’t really sure what to think. I’d be lying if I said I understood half the factors at play here. I hear doomsday stuff from JC, less pessimistic stuff from others, whilst business (for me at least) still seems to be booming – albeit under a cloud of anxiousness over “What Will Happen Next”

I find it hard not to be optimistic, but I like to hedge my bets. So, just how worried should I be? Will the finance sector drag us down? What should I be buying/selling? What should I be doing with my money? Is it safest in certain stocks, banks, property, gold, under the mattress?

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87 thoughts on “Where to Put Your Money?”

Look Fleeced. JC is full of shit. All that needs to happen is the Americans need to produce cash via debt retirement.

What they can do is get the printing presses going and retire heaps of debt. As things stand the Feds spend 1-2 billion each day more than they take in in cash. So it could simply be a question of stopping the increase in debt.

Then what you need to do is to make sure all the extra cash isn’t inflationary. So you have to put in a reserve asset ratio that will restrict gross domestic revenues from growing too much above its previous high.

You try and get people to liquidate or pay off their debts as you add more cash and you put up the reserve asset ratio in order to not make this inflationary.
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Humphreys you’ve said something similiar. Why not take the blocks off. People ought not be sucked in by bankers holding out their hands and threatening to with-hold our own funds.

This is just the banking belligerence that always comes out when their racket begins to unwind.

This is just the banking belligerence that always comes out when their racket begins to unwind.

Yeah pretty much. But the trouble is the economy might fall to bits and everyone end up on the bread line. Maybe not. But no government will take that chance.
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Question is how to sort it so it doesn’t happen again. I have no idea. Seem they’ve tried everything and the floor always caves.

Though, as others have pointed out, the finance sector has never been a free market – particularly in the US. Check out their “Community Re-Investment Act” for one thing.

Sadly, most people seem to be blaming the “failings of capitalism”. And Obama keeps saying, “McCain was for deregulation – but these latest collapses prove it’s a bad idea”. I feel like slapping him when he says that.

Sadly, most people seem to be blaming the “failings of capitalism”. And Obama keeps saying, “McCain was for deregulation – but these latest collapses prove it’s a bad idea”. I feel like slapping him when he says that.

I really don’t know where I stand on the regulation/deregulation issue. I’ve been trying to understand economics. The more I read the more confused I become.
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But isn’t this latest collapsing house of cards the result of destructive bad behaviour? And aren’t laws the way we deal with bad behaviour which is destructive of others. Slap Obama all you want but doctrinaire declarations of the desirability of laissez-faire capitalism are hard to sell in these circumstances. Especially since so many people who usually blow that bugle (Murdoch for example) are playing the bail-out tune now.
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Cynics say the US system is capitalism for the poor, socialism for the rich. This episode provides evidence for that assertion. Whatever the veracity of arguments about regulation and deregulation I call bullshit on the moral position of anyone who thinks spending public money providing health care or education is wrong and then says out the other side of their faces: oh please bail out the greedy arseholes at BastardoBanc dot com.
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Here’s a thought. You want deregulation. Acquire a sense of responsibility that extends beyond paying your bills. Dare I say civic duty? If this sort of behaviour didn’t happen in the first place there wouldn’t be any need to gum up the works with red tape.

Fleeced we’re always on the same side of the economic debate so I don’t why you’re being so harsh with me :-).

You seem to take the view that because I may sound arrogant to you because I have implied a few times I may know about this subject more than the average person. I actually do as I worked in some of the most interesting markets for the past 25 years.

I’ve seen it all, the panics, the recessions , fucked up banking systems, financial markets pressure, devaluations and the good times.

At one stage 9the (most recent) part of the desk i ran had a few guys trading the Argentinian Peso when they experienced economic collapse.

I don’t ever make doomsday predictions and I’m not making one now. However I haven’t seen the world/US is a such a tense economic predicament and if it doesn’t ease up really really soon it’s going to be a big problem.

Banks are really important to the capitalist system as they act like the arteries carrying the blood around. At the moment all major arteries a clogged up and barely functioning.

Banks losing money has real consequences for the real economy as every one dollar they have to write off means about 14 dollars of loans they can’t make.

The deleveraging going on is huge and is actually accelerating. This is happening around the world and believe me it isn’t good.

“But isn’t this latest collapsing house of cards the result of destructive bad behaviour?”

I would argue that it was caused primarily by bad regulations… “bad behaviour” was a factor – but the regulations did nothing to prevent it – in fact, it seemed to encourage it. You think Fannie and Freddie gave Obama over $100k because he supported regulation that stopped them from being bad?

I don’t feel like slapping Obama because he has a different ideology – I feel like slapping him because he has defended the regulations which contributed to the current crisis.

He even worked for a law firm that sued Citibank for not providing enough subprime loans (a lot of poorer people in the neighbourhood were black, so it was obviously racist not to give them loans).

I’m with Bird… we can’t let the banks hold us to ransom, demanding that taxpayers give them a hand-out because they’re scared that their own risks have turned sour.

This isn’t the end of the world. And we don’t need the bail-out.

JC is absolutely right that we’ll see a contraction in broad money supply. But he’s absolutely wrong that this necessitates nationalisation and regulation. What it requires is that the fed finds another way to re-inflate broad money supply.

According to Austrian economics, the business cycle is the cause of fractional reserve banking. If you believe that then the bust of the US housing bubble that has caused the current crisis is the result of fractional reserve banking.

Wash Mutual failed 2 days ago. It has $100 billion of assets. That’s the last one. Add all the others.

And I’m not talking about any form of nationalization. This is a form of intervention not nationalization. Liquefying the system is also a massive form of intervention. In this case it choose your poison.

As I understand the bail-out package, the government gets an equity stake in the businesses it helps. Anyway, the bigger problem is that they are specifically going to buy crappy assets.

For better or worse, the fed currently controls the currency in America. That means it’s their responsibility to keep money stable. Managing money supply is their job, so it’s not strange for me to suggest they should manage the money supply. Intervention perhaps, but the same intervention they do every day.

One curious question here is how a private money supplier would respond in this situation. I don’t know the answer to that.

AH — you meant to say that FR-banking causes the business cycle, not the other way around. Anyway, that’s not what Austrian economics says. It says that unstable money supply leads to the business cycle.

And even if this crisis was caused by FR-banking (which it wasn’t), the benefits of FR-banking are so huge they more than outweigh this problem.

Fed intervention is also limited to the size of its balance sheet which I believe is around $750 billion. They are currently using approx $400 billion for liquidity provision and anchoring down the Bear Stearns failure and the AIG. They are also dangerously close too.

As I understand the bail-out package, the government gets an equity stake in the businesses it helps.

the government gets warrants which is not exactly an equity stake. Warrants wouldn’t give them any authority at the board or management level.

Anyway, the bigger problem is that they are specifically going to buy crappy assets.

They already are in a sense through the recent changes to their repo agreements allowing them to take all sorts of crap on their books.

Here’s where I see it:

The current operation , which is a liberal and open Fed window for crappy assets as collateral has a consequential effect on the money supply whereas the outright purchase of the bad assets wouldn’t.

The reason is that it would be the US Treasury buying the assets and wouldn’t have any effect on the money supply because of the way it will be done as it won;t be a printing press operation.

Why?

The US Treasury will ask the Fed to raise it’s weekly bond sales program to align with the asset purchase. The Fed sells the extra bonds, takes the money and gives it to the Treasury. The Treasury would in turn use that money and buy the assets and that cleans up the balance sheets of the banks. That has a net zero effect on the money supply although the Treasury would assume credit risk on the discounted assets.

it also alleviates the Fed from having to pack its balance sheet with rotten assets and allows them to conduct monetary policy is an unrestrained manner if required in the future.

The Australian government has decided to inject $4bn of liquidity into the market locally.

That strikes me as a particularly good idea. In practical terms it will lend money to non bank mortgage providers to enable them to issue loans and compete with the banks. The banks will then have to decide whether to keep their money as some kind of pet or lend it out like they used to. Inevitably they’ll be unable to sit and watch while someone else gets their business.

If the US fed did the same thing, on a proportionally bigger scale, I don’t see the problem. Liquidity would be freed up, but the organisations that made unwise investments would fail. Exactly as the market determines.

Another way would be to shoot the 500 or so credit managers who are refusing to lend money. They are the cause of the problem. I’ve met a few of them and believe me, they are no geniuses. But since shooting is no longer allowable, a liquidity injection that proved they didn’t deserve to retain their jobs would probably be next best.

JC — there are lots of ways for the fed to get money into the economy. If broad money is contracting, then printing money and dropping it out of a helicopter (as Bernanke once mentioned) isn’t such a bad idea.

$700 billion is a lot of other people’s money to spend on buying crap financial assets. And it takes the responsibility away from the people who made the bad investments in the first place… thereby retaining the perverse incentives that were one of the causes of the crisis.

The world isn’t ending. Let the banks fail. And have the fed do it’s job and ensure that broad money supply doesn’t contract.

Incidently, Milton Friedman’s opinion of the great depression was that it would have been a fairly standard recession, except that the fed allowed a significant contraction in broad money supply. I agree with his assessment back then, and I think we’re facing a similar thing now.

JC — there are lots of ways for the fed to get money into the economy. If broad money is contracting, then printing money and dropping it out of a helicopter (as Bernanke once mentioned) isn’t such a bad idea.

I think and hope helicopter Ben was joking about that. But really John, who wants to reach that stage when to all intents and purposes the US would be following the economic/monetary polices of Zimbabwe.

$700 billion is a lot of other people’s money to spend on buying crap financial assets. And it takes the responsibility away from the people who made the bad investments in the first place… thereby retaining the perverse incentives that were one of the causes of the crisis.

It’s judgment call in terms of which intervention policy is the worst.

The world isn’t ending. Let the banks fail. And have the fed do it’s job and ensure that broad money supply doesn’t contract.

Yea, but bank failure these days doesn’t really mean what it used to mean. Ask Main Street USA if they favor the proposal and the vast bulk would be against it. Ask them if it meant their deposits wouldn’t be safeguarded without it and you would end up with a different answer. These days banks failure means it’s the stockholders and the riskier debt holders who get whacked. Depositors don’t really have a care in the world. So bank failure has taken on a new meaning. Furthermore there is risk at the shareholder level: there’s no real moral hazard there. However moral hazard is alive and well at the depositor level. That’s why Main Street is so casual about things these days. There’s also the added satisfaction Main Street is getting watching the rich executives getting their comeuppance.

Incidently, Milton Friedman’s opinion of the great depression was that it would have been a fairly standard recession, except that the fed allowed a significant contraction in broad money supply. I agree with his assessment back then, and I think we’re facing a similar thing now.

So why encumber the Fed with shitty assets when they may/will actually need to swing these round quickly without having to corrupt the Fed’s Balance sheet.?

If we load up the Fed with crap the end result is that the US Treasury will have to bail out the Fed by writing a large check, which actually is where the rubber meets the road in terms of the printing presses. This is where I see the real problem that no one has really spoken about.

If the market catches wind that the Fed has to be bailed out by the US treasury as a result of its balance sheet getting corrupted the consequences are enormous.

There would be a wholesale dumping of the Dollar, commodity prices would go skyward and the US bond market would get absolutely trashed. Forget about the stock market, as that would be down 3,000+ points. In other words the collapse of the Dollar would cause an enormous deflationary impulse throughout the world. Don’t forget that the US still has to finance a current account deficit of $60 billion per month (approx), which is around 5% of GDP.

Seriously the last thing we need is the Fed’s balance sheet getting loaded with crap and the rest of the world that is asked to finance the US C/A is expected to sit around and watch? Naaa won’t happen.

This is why I say this shit is far more serious than what people think and why as bad as it is (evil in fact) it’s better to load up the Treasury with the discounted debt and allow the Fed to run monetary policy encumbered with crap sitting on its books.

I think Swan’s decision was a really stupid one. We don’t have any issue with the mortgage market here been in distress the same way the US is. Our banks aren’t in any great danger although ANZ may require a recap top up only.

Swann’s decision was idiotic to say the least. That’s just mindless interventionism.

The fear from this meltdown of the sub-prime market is not the collapse of liquidity; the fear is the collapse of credit. The world’s central banks opening up the money supply floodgates is merely hand-patting to restore some calm; the fundamental problem–a credit squeeze–has yet to be addressed.

Essentially, the markets are asking the same question of the posting: Where to put their money now? The worrisome answers, so far, do not include using credit, because the lenders are, understandably, hoarding their liabilities (making a loan is a bank asset).

The Community ReInvestment Act mandated irrationality in mortgage lendng–home loans to people who would never be able to make the payments in an unregulated market for interest rates–so the credit ‘crisis’ is, once again, the result of government intervention in the open markets on behalf of a worthy social goal. Where to put your money? Short the government; go long in open, free markets.

I still think we will get through it, there is no gold standard, its just a matter of swapping liquid paper for illiquid paper in a manner that allows liquidity to be removed when the private sector gets over itself.

No people. Don’t pretend that there is any justification for this heist whatsoever.

Humphreys has already told you what needs to be done. The only action that is needed is an increase in monetary base. Just as Humphreys said. The only way I would differ is that I would say you need a reserve asset ratio as well.

Let’s see you tell us exactly what the Fed will take in it’s books in order to raise broad money? What you’re saying is that it’s okay to stuff Fed balance sheet with useless crap to an even larger extent than now.

So either way the government ends up with the shit. But with the current strategy the Fed will eventually have to get bailed out too.

Its just got to pay off its own debt. There is no need for it to increase its debt. It ought to reduce its debt. This is just money printing. And if its not the creation of cash it cannot do a damn thing at all.

Stealing is not the answer when cash creation is. Stealing is no substitute for cash creation. Its not a question of the idea that you don’t want cash creation so you have to accept stealing. Only cash creation can do any good when the ponzi-scheme unravels.

Excuse me, Australia, but it is important to understand that the financial meltdown in America is occurring while the markets are being flooded with cash from central banks all over the world. The crisis is not liquidity; there is plenty of money available, as interest rates show. The crisis is credit; although money is ‘cheap’ and readily available to banks, they are not lending, because they are scared half to death that the meltdown will include them.

The ‘credit crunch’ is what is threatening the entire financial system. If lending continues to stall at such a massive, nationwide basis, the American economy will tank into its deepest recession since 1982. An anology is the severe economic contraction after the oil embargoes of the 1970’s: American firms refused to continue funding their R&D, wanting to conserve their cash during the sudden surge in oil prices. The unintended result? A decade of falling productivity, and worsening competitiveness. On an inflation-adjusted basis, the American economy in 1982 hit the exact lows of the 1929 crash.

It’s lack of credit, Australia, not flush cash, that is sucking at us like a doomsday whirlpool. The banks are terrified, and they’ve closed their tap. Think of libertarian economist Milton Friedman’s Nobel Prize in Economics: MV=PQ. As ‘velocity’ plummets, GDP will shrink.

To a libertarian economist, all of this played out on the editorial page warnings of the WSJ for the past three years. But none of our political leadership are libertarians, and too many do not read the Journal.

Markets measure confidence. So does credit. Without credit, market confidence whithers until it can find a bottom where all confidence is exhausted.

It not anyones trouble that they have toxic waste on their books. They ought to sell it the best they can. It is stealing and it is a heist and obviously so. You claiming that this isn’t theft is just ridiculous. You are lying. No-one wants to buy this crap. Hence the government will buy it. Where’s it getting the money from? Stealing? Borrowing abroad? New Money Creation? If its the first two it cannot help the situation. And if its the third then they don’t need a banking sector heist to do it.

You lying and pretending that this isn’t a banking sector heist doesm’t make it so. If I got someone to come through my house and start buying up all my old gear at a premium that would also be a heist. We got old shoes here for $200 each. Tee-shirts going for $70 a pop. You are just lying is all. Its no problem for main street that these banks have got this stuff on their books. Its only a problem for main street that these rich welfare recipients are going to get main street to buy this stuff.

You say yourself that the stuff is toxic. How does forcing other people to buy toxic stuff help them out? It doesn’t. So its just an unbelievable heist.
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Letting Wall Street go bankrupt is fine for main street. The dissapearance of ponzi-money is what is not fine for main street. What is not fine for main street is for wall street to be bailed out. Thats a heist. No good can come of it. The answer is obvious. Increase the monetary base and put in a reserve asset ratio. Stealing or pulling off a heist won’t help even a little bit.
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Low interest rates are totally ineffectual at all times. They are simply a way for the banking sector to steal off the rest of us since they get money at below wholesale prices that way. Thats theft since obviously if I got to borrow at that discount I’d be far better off than I am now.

Only new cash and a reserve asset ratio will do. No stealing can possibly be of assistance in this matter.

Please don’t accuse me of lying as I am not lying. That’s just needless abuse.

Perhaps you could tell us how the banking system is supposed to get back to mormal if the credit markets have seized up. Banks are not lending to each other. As I have said even interest rates at zero can’t change that. In fact zero interest rates could act in a perverse way as it offers little enticement to lend and instead keep balances in T notes which are basically yielding zero at the moment.

Paulson is the new Hoover. He’s a public menace busily charging about doing exactly the wrong things. He’s doing things designed to continue this crisis.

You have cash. You have debts. And you have ponzi-money. The idea is to vigourously bring down the levels of debt and ponzi-money and bring up the level of cash. So these stimulus packages are part of the problem and are surely helping to precipitate the crisis.

They have got to just increase the amount of cash out there at the same time as doing what they can to get the banking system into retrenchment and liquidation.

If I understand the first table correctly (which I may not):
1) The amount of money held in reserve by depository institutions (mostly banks I assume) increased 232%. Reserves are usually around 5% above ‘required’, but are currently 269% above.

2) The monetary base has increased by 8% in 2 weeks.

Does this mean:
1) Banks are hoarding money, i.e. as you say, they are not lending to each other?

2) At 8% per fortnight, does this mean the US inflation rate could reach 208%pa?

I swear, I’ve already explained this several times. Anon — inflation is not caused by increases in the monetary base. Inflation is caused by increases in broad money. That includes credit. And as you’ve noticed, banks are not lending.

Broad money is going down because of hording. The logical response is to temporarily increase base money supply so that broad money supply stays constant.

The Austrian way of teaching monetary economics has lead to lots of confused people.

JC… if the fed cuts the overnight interest rate, that doesn’t mean banks have to cut the retail rates. Indeed, I would expect the gap between the overnight and retail interest rates to increase to represent the higher perception of risk. But that’s not the point. There are lots of ways for the fed to put more money into the economy.

As Bernanke once mentioned, you could use a helicopter.

When you say “get toxic waste off the books” you’re saying that we need to protect banks from the consequences of their decisions. If you invest in crap, then you get crap. I’m sorry for those people… but toxic assets exist because somebody created them, and they should be stuck with them. They shouldn’t be able to pass them on to innocent taxpayers because they can sell another fear-campaign to an ignorant electorate. If a company has too many toxic assets, let them go bust.

Graeme — please play nice. This is a moderated blog. We love disagreement, but we try to argue like we’re all friends. JC isn’t lying. He’s just wrong. 🙂

My uninformed initial thinking is that fractional reserve banking isn’t as important as you seem to imply, so I’d welcome any rebuttal of the following (and maybe I’m reading too much into your defence of FR banking):

(1) How can a monetary phenomenon increase the volume of real things in an economy? The increased lending under FR banking may increase the dollar value of investment, but as it can’t increase the number of factories/mines that an economy can sustain, won’t it just increase the price of those factories/mines?

(2) Are there banking systems, like a number in asia, whose lending is far less than their deposits? Aren’t these systems sound, and aren’t the associated economies strong?

(3) Isn’t doing less lending per deposit an optimal reaction to the realisation of unsound lending practices? Isn’t attachment to the current prevalence of/reliance on credit just status quo bias? Wouldn’t an increase in equity-funded investment offset to some extent a decline in credit?

John H,
By the way, I agree with you on everything else, including my guess that you’re essentially suggesting that the Fed should have an inflation target. That said, I don’t envy anyone trying to predict US inflation right now.

The Fed cutting rates has the effect of passing a larger spread to the banks if of course they are able to keep the margin. However that only works over time.

no, I’m not saying that the government should run a protection racket if say one bank was involved. However if the entire system is basically not working one thing they could do is take the risk of their books and run it to maturity or try to create a secondary market in this stuff.

the problem is that as it currently stands one bank panics, sells out their position and that creates a new mark to market for the rest of the stuff against the benchmarks.

The feds are all supposed to be given warrants against the stock if the banks sell the securities to them as part of the deal so there is risk reward to the tax payer.

The idea is to vigourously bring down the levels of debt and ponzi-money and bring up the level of cash. So these stimulus packages are part of the problem and are surely helping to precipitate the crisis.

Bird, you strategy of “vigorously bringing down the levels of debt” would make the 30’s feel like it was the tech boom.

Adrien:

Stop being so melodramatic. No freeish markets will not disappear anytime soon or if they do for a time, it will quickly teach people the lesson that socialist methods don’t work. But hey, if people need that lesson, then so be it.

If we’re going to be totally fair about bank failure the depositors should also be standing in line rather than being treated as some protected species.

As I said Main Street is against any bailout as long as Man street is bailed out. Moreover street were always the big beneficiaries of big government largess as a result of mortgage relief programs instituted by both political parties. In other words Main Street is up to its neck in pork.

But its the bankers who have caused the problem. You are wanting to steal of main street to bail out the guys who caused the problem. But this won’t work, not even in the short run. Its ok to create the cash to compensate for the ponzi-money that dissapears. Thats simply stable monetary policy. So after the bank declares bankruptcy and all these guys are fired and no longer able to get salaries its not such a bad thing that the government compensate for the life savings that the bank has embezzled.
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Right so the monetary base has increased 8% in two weeks. This is a bailout of the banks in an of itself. If they keep going in this fashion and just let all the banks collapse thats a pretty good way of doing things.

Direct stealing and bailouts cannot help in this process even a little bit. Obviously if they are putting in all this cash they ought to have a RAR to stop it becoming inflationary. That they are being cautious about it is simply because they don’t have an RAR. If these guys get out of trouble it won’t be any stealing that enables them to do so. It will have been this increase in the monetary base.

How will stealing off main street work at all? It cannot work since its not creating cash to replace the collapsing ponzi-money? So its just stealing and it cannot work. Paulson is clueless in this regard. Thats why he went for the stimulus package. Totally wrong-headed like Hoover.

No my strategy is not just an alternative. Its the only thing that will work.

There is too much debt and ponzi-money and not enough cash. So there is no substitute for bringing down debt and bringing up cash levels. How can you make your lying claim JC? Its a matter of degree. How much cash you produce. If you don’t get it right it could be inflationary. You are lying and arbitrarily claiming it will definitely be DEFLATIONARY since you want the socialism and stealing. But this is a QUANTITATIVE matter you dope. The idea is to create enough cash that things aren’t too deflationary. But not too much that things become inflationary.

Try again and this time attempt not to be irrational. This is a quantitative matter and you are hardly in a position to arbitrarily claim that it would be deflationary.

Why should main street cop it when it is the bankers that are to blame? Obviously the idea is to bail out main street without bailing out the bankers. The bankers have made their profits through the entirely unproductive process of money creation. Now they ought to cop it.

… This Paulson is putting red ink everywhere. Its a similiar mental fallacy that the Keynesians have thinking that fiscal policy can work. But what Paulson ought to have done is create the necessary new cash but at the same time be as feverishly against red ink as he can possibly be. He’s treasury secretary for Pete’s sakes. He ought to be running round trying to save every last dollar he can.

Look at all of this Paulson spending coming on top of war deficits and general overspending. This seems to be an attempt to turn the US into Zimbabwe.

We know how to do this. Paulson ought to be acting like Martin Van Buren and he ought to be charging round convincing people to save more and spend less. Trying to get spending cuts out of the Feds and the States. Stop spending, stop borrowing, try and save.

The only difference with Martin Van Burens situation and ours is that the money supply has so much further to fall. So you do need a lot of extra cash.

There is no mystery here and we know how to get this done. Its not through fiscal policy or bailouts. Thats just Keynesian fallaciousness.

For what it’s worth, I’m definitely opposed to the bailout on principle.
I can’t see how the baliout won’t ultimately have negative economic consequences overall.
However I doubt the masses will realise and I’m sure there’ll be a shitpile of political spin in the process.

Actually I think libertarians and others with a brain in their heads should be working hard to inform the masses of how both the sub-prime mortage and the Fannie Mae Freddie Mac situations were caused by government intervention and distortion of markets.

Markets are getting blamed for this shambles and average joe is becoming more socialist by the minute.

Letters to the editor, letters to politicians, internet blogs, emails to friends, whatever you can do would be valuable IMO.

JC — contrary to Bird, I do accept that depositers also have taken a risk, and need to face the consequences of that risk. It’s harsh. But I’m a harsh bastard.

The government cannot remove risk. They can simply redistribute who pays for it. But the problem with socialising the costs of wrong decisions is that it removes the incentive to make the right decisions. That incentive is hugely important to the efficient running of capital markets, and the efficient running of capital markets is perhaps the biggest factor determining growth and wealth levels.

Yes, free capital markets still make mistakes. But that’s nothing compared to the mistakes that political capital markets provide.

JC — I accept credit has collapsed. That won’t last forever. Already there are a growing number of people in the market picking up super-cheap risky assets. The risk premium on some assets was too low… but now people have over-reacted and it’s too high. It won’t take long before some savvy investors start to snap up a few good deals. Apparently those russian oligarchs have a bit of spare money. 🙂

And pumping base money into the economy will help to speed up that recovery. In the meantime, there will be some pain. Like what Schumpeter once called a “cold shower”, and necessary for stronger long-term growth given the pre-existing malinvestment.

(1) The virtue of FR-banking is not that it adds money to the economy. While I do believe that an activist monetary policy can impact on the real economy in the short-term, I think it has more costs than benefits and I don’t support it. The virtue of FR-banking is that is allows a more efficient matching between savers and borrowers. Under FR-banking, interest rates are lower because of the more efficient matching, not because of the higher money supply.

FR-banking is like a new technology, allowing pre-existing materials to be put together more efficiently. Banning FR-banking would be like banning the computer (and then saying that “well, banning computers won’t impact how many factories exist”).

(2) Don’t know… but would be interested to know more if you have a link.

(3) I agree. If risk has been under-estimated previously (as I think it has in some areas) then the risk premium will need to increase, increasing the market interest rates. As you say, that will increase the incentive to use equity-finance. But perhaps more importantly, it will impact which areas of the economy recieve the financing.

Of course, anything that artificially changes the perception of risk (such as the world’s biggest bail-out) will undermine the accuracy of future risk assessment.

If the US was in the throws of a credit collapse and that was inducing a real world deflation then I’d agree that the base money supply should be increased (although preferably not using a helicopter). However the current price of commodities would suggest that the US dollar is actually too weak, not too strong. If there is a deflation happening it would seem that it is confined to specific assets such as property. Put simply I don’t believe there is deflation happening in the USA. The buying power of the dollar is not increasing due to scarcity. Can anybody show me a price index of any sort that says otherwise?

I don’t think there should be bailouts, however nor do I think these failures are merely down to poor management practices. The recent run of articially low interest rates and soft money in the US has brought on this problem. This should be apparent given that some of the businesses failing have historically been amoung some of the best managed in the country (USA).

In my view Aussies should not need to worry too much so long as their money is in an Aussie bank that lends mostly to Aussie borrowers.

Unlike American borrowers, Aussie borrowers can’t walk away from their morgage responsibilities (except via bankruptcy) simply because the debt has entered a state of negative equity. As such Aussie borrowers have a far greater incentive to honour their commitments. Also our domestic interest rates have been set at a more realistic level over recent times.

Well John in this case if you are going with fraud banking and burning people to maintain solid practice then your position on depositors was consistent with that. So thats no disagreement that I’m going to resent. But the government had pledged to insure deposits up to $100,000.

The logic of fraud banking is such that if the government insured depositers that would be putting a penny in the fuse box. Because for fraud banking to work we must rely on depositers ripping out their deposits at the slightest show of shonkiness. It might be under that situation depositers and the banks might agree on at least 40% self-imposed RAR.

But I won’t fault you on that side of things. However I would point out that if you want to make that sort of deal you have to be totally harsh. You can stop these bankers getting the benefit of new money creation by force. Or you can make them only take advantage of this ability a little bit by letting them live in debilitating fear.

If you have this thing for fractional reserve you will be courting disaster by allowing anything that takes the fear away from either them or their customers.

So I can see where your instincts lie here. But the fact of the matter is the government had in effect promised to back that first 100,000 dollars. So surely the deal is to bankrupt the banks. Produce the cash to deliver on that first 100,000 and tell these guys that from here on in no deposits will be covered. Thats from your point of view.

From my point of view the idea is to ban fractional reserve. Bankrupt all these banks, replace slowly the ponzi-money with cash money, and before that process is over beging replacing the cash money with commodity-backed money. Starting with gold, silver, copper, even oil since they have the strategic reserve facilities….. anything that you can buy in the dips and accumulate without causing a new high in the price. And then once you’ve managed to replace all the fiat cash with commodity cash its time to throw it open free market.

Your fraud banking would need to be guided to about a 40% RAR before you could throw it open. I don’t think thats a good idea going that way at all. I think its a very bad idea. Because it assumes that banking and government are distinct entities. But its better to think of them as govybank. Or bankyment. Its a counterfeiting racket that the two are involved in and its not possible to disentangle them without doing away with any possibility of the racket whatsoever.

Right but Terje if you are trying to anticipate things one ought to feed in some extra cash because as each financial institution collapses thats a reduction in ponzi-money right there. So at the start of the process there might not be a shortage of USD. But you know that by the time all these guys are out of action and walking around looking for work, you know that the money supply will have collapsed. And knowing that in advance you would want to issue a bunch of cash. Not enough to stop these guys all keeling over. But enough to isolate main street from it all.

If you don’t trust the responsiveness of your indicators then you might need to guess ahead in the manner you describe. However commodity prices (eg the gold price) have a long history of being leading indicators not lagging indicators. When the gold price starts going south (or perhaps even stops going north) then I’ll be more inclined to listen to the argument that more base currency is needed.

Now does anybody at all have a real world price index of any sort whatsoever that suggests that the US is suffering deflation. In other words something other than supposition. Otherwise I’m calling bullcrap on the notion that the US is in the throws of deflation that requires more base currency (from helicopters or otherwise).

There’s a credit crunch of pretty big proportions, terje. it’s basically locked up the credit market. Banks and shadow banks have fallen by the week. Wachovia looks like it will be done sometime this week.

Tight funding across the world has an impact on us by virtue of the current account deficit, Terje. It means we have to pay more for funds which is why money is so tight.

We’re basically at the mercy of world liquidity. Not saying that’s bad or good, just making the observation. The banks margins are definitely being impacted and so are the cost of funds for any borrower.

Look JC. We see you here claiming that the banking industry ought to be subsidised more than national defense. But what we don’t see from you is a reason why????

Why would the community subsidise the banking industry hundreds of billions of dollars? It would be nice if you had a justification, but you refuse to come good with it.

Debt creates wealth when it is on the basis of savings. And when that debt is used to expand a pre-existing cash flow. Your industry doesn’t create a great deal of wealth. What you do instead is create a great many problems and then capitalise on these problems by selling various financial products, most of which wouldn’t be in demand if it wasn’t for the original govybank counterfeiting racket.

This fraud banking is no good. It means at all times you will have distortion in the market. Its a religious thing that people seem addicted to. But there is no reason why the community ought to let a priviledged group get the benefits of money creation. Fraud banking is some weird daydream. Its never happened. Always the banks have managed to gain for themselves special priviledges. And it sets up an income stream for these guys to use to conspire to do whatever is necessary to get hold of the gains of new money creation.

The gains of new money creation ought to go to our extraction industries. They actually produce things that are worthwhile. And banks ought to be satisfied with making an honest living getting a cut of interest rather than getting all the gains of new money creation.

Terje. While it appears a mystery to you this monetary system is no mystery to me and so if these banks were keeling over I would see no need to wait until what I already knew was going to happen happened. If an institution goes under, the money supply collapses along with it. You might not quite believe this but it does in fact happen. And its not something I would pretend not to know about and wait until commodities prices had collapsed as well. There is no need to wait and hurt main street unnecessarily when you understand the situation and know things happen as surely as night follows day.

I’ve never seen you yet display any understanding of cash and money-supply being two different things and so that therefore its hardly surprising that you would wait too long before producing the extra cash.

I would like to see some justification why this industry ought to be subsidised by allowing them the benefits of new money creation and through bailouts?

A subsidised industry is an inefficient industry. And in any case allowing one clique to gain the benefits of new money creation is unfair on everyone else and does grave economics damage.

In the seven years from Jun 01 to Jun 08 the money supply increased around 76 billion dollars. About 50 billion dollars of that direct money-creation-benefit went to the financial sector and about 26 or so billion went to the government.

Why ought we let them get even one dollar of this benefit? It just ruins their role of directors of investment funds. It ruins the motivation for them to direct savings to its best possible usage. And it brings with it a lobby-group for inflationism.

So what is the justification of it all? Certainly there is no ECONOMIC justification for compromising ones capital market in this way.

For what it’s worth, Prez Bush admitted that his free-market instincts were telling him to let the market decide how things would work out, but his party seems to have other ideas. They want to be seen to be doing something, principles be damned!

seriously are you just a keyboard the spews out random words which like an orchestra of monkeys may eventually make a tune that sounds melodious? In your case the keyboard has is caught in a monetary policy vortex and just can’t let go.

Okay Bird where is the collapse in money supply as a result of all these failures.

The failures haven’t led to any fall in the money supply, but the deleveraging has.

Why is it that you think that these guys not only ought to get the implied subsidy of being able to create money. But also hundreds of billions of dollars in bailout money.

JC. You don’t have an argument fella. If you even had one argument in favour of this outrageous heist it would be lonely. You’ve come out strong in favour of crony-communism, but what is the argument for this. We don’t need to know which side you are on. You are in favour of this plundering. But what is your argument to justify this?

Prez Bush admitted that his free-market instincts were telling him to let the market decide how things would work out, but his party seems to have other ideas.
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Nonsense.
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Dubya’s been gunning for this. His party in congress stalled it. He wouldn’t know a marketplace if it bit him on the arse. He’s a classic Crony Capitalist upper class twit. If he had to compete in the world sans his entourage he’d be struggling to hold down a job as a gas jockey.

So lets go AGAIN JC. What was your argument in favour of this bailout? That right you didn’t have any such argument. But on reflection what is your argument in favour of this bailout now?

We cannot let these guys fool themselves that they are some sort of productive crowd. If any one of us had the ability to take full value for the creation of new money whoever has this ability can expect to get famously rich. The banks in our country have this subsidy to the tune of billions of dollars each year.

No you haven’t come up with any argument whatsoever why the rest of the community ought to bail out the banks.

If you make that claim you are lying.

So lets go again. Why ought the community bail out the banks?

Why not just add cash to the situation and a reserve asset ratio to stop the cash becoming inflationary?

Go!!!!

You haven’t come up with a reason for doing this. Its just stealing. You claimed it wasn’t a heist. It is in fact a heist. So you make these claims. You ought to back it up.

And you’ve also lied and tried to tell people that I don’t know what I’m talking about but I do and thats just you bullshitting.
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Stealing 700 billion off the taxpayer for the purpose of bailing out the banks is indeed a bad thing and ought to be unlawful and I’m sure that it is under the American constitution.

But its not just 700 billion. As we have seen Paulson is spewing red ink everywhere. So by now his measures are well over the trillion dollar level. Clearly he is incompetent and doesn’t know a thing about monetary-economics. He just wants to bail his crowd out. And his crowd have that sense of entitlement where they think stealing hundreds of billions of dollars for their benefit is just fine.

Cambria reckons he’s explained his position in favour of this massive stealing for the benefit of the banks.

Now I say he hasn’t. Can anybody find the Cambria argument? Can anybody find that killer argument that Cambria reckons he’s made in favour of taking hundreds of billions of dollars off everyone else and bailing out the banks?

It won’t even work. The only thing that will work is expanding the monetary base. Which they are doing but not talking about. In fact Bernanke mislead Congress since he implied that this isn’t happening. It has to be happening sonce the ponzi-money/cash ratio started off as so horrendous that the ponzi-money has too far to fall. So in fact they have no choice but to increase the monetary base and thats the only thing that can possibly work. It doesn’t matter how much money they steal. It will be to no avail. And only the increase in monetary base will have any effect.

No you didn’t have a valid argument. If so can anyone tell me what Cambrias argument was.

You see this year they are spending so many hundreds of billions on defense. But Cambria reckons they ought to also spend several hundred billion dollars on bailing out the banks.

Now how on earth could you justify this? Bear in mind that providing more cash is itself a bit of a bailout that they don’t really deserve. But it is however not causing the government to take on more debts.

Did anyone actually see Cambrias argument? The missing Cambria argument. The missing and secretive Cambria argument. Paging the mysterious Cambria argument. The argument for bipartisan stealing on behalf of the banks?

Nope. Cambria. I’m afraid its not there. I’m afrraid that you’ve just developed this sense of entitlement. But don’t stooge yourself into thinking that this fractional reserve money creation and the extra speculative behaviour it engenders is somehow productive activity.

An group of spokesmen for the farmers showed up to ask Calvin Coolidge for Federal help. Coolidge just told them to find religion. He wasn’t going to give them even one dollar.

Now those were poor farmers. But in this other case we are talking about rich bankers who have objectively screwed up. So why ought they even get one dollar in bailout money?

We can never get to have a powerfully effective investment sector if we continue to prop up these multimillionaire welfare recipients. This was a good opportunity for the industry to be cleansed and find itself a more productive platform and set of ways of doing things.

You see this sort of monetary system is bringing us all to ruin. Its better that the Americans let them go bankrupt and we free up our own banking system in an attempt to reform our act as well. This monetary system is leading the Americans to lose all their industry. To put red ink everywhere and to stop exporting to the degree they ought to. Its doing immense harm the longer we keep these bankers in the air.

What a pleasure to see that Joe Cambria’s finally broken his cherry. He’s learning just how brutal is the Byzantine epistemological labyrinth that is engaging Graeme Bird in debate.
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Try this: accumulate massive amounts of data, preempt the criticisms and deal with them then compose a huge 10 000 word argument that is absolutely peerless.
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And what happens?
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Where’s the evidence you dope. You haven’t made any argument. No you are lying. 🙂

One more time. We in the U.S. are in a credit crisis, not a liquidity crisis. There is plenty of cash around for everyone. For confirmation, look at our interest rates. More money supply is NOT our current problem in this credit crunch.

2. Our banks are not involved in a Ponzi scheme; to think so reveals a populist view, not an educated libertarian view. Extensive readings in macroeconomics would appear to be a defining quality of being a well-rounded libertarian.

3. Further lower interest rates will not open up the credit tap. Japan did that at zero interest years ago, and paid for it with more than a decade of stagnant growth. In terms of neo-classical economics, the Aggregate Supply curve in the U.S. will go vertical as we approach zero interest (we are currently down to 2%). As Japan showed, once the AS curve goes vertical NO monetary actions by the central bank will have ANY effect upon economic growth. Effectively at interest rates around 1%, an economy justs sits on the edge of a cliff, waiting to collapse. How far the collapse will go, and when it will occur, is completely unknown.

4. This crisis is grounded in government intervention in the financial markets on behalf of a worthy social goal. The government created the original problem in 1977, and then exacerbated it in 1995. When our central bank responded to 9/11 by flooding our economy with cash in late 2001, we entered into a never-seen dream world: Rising asset values, ‘zero down-payments’ to acquire those rising-value assets. The golden goose had arrived, and all of Wall Street–AND Main Street–jumped in with everything they could beg, borrow, or steal. Loan fees fed the bankers, and rising asset values fed the frenzy of creditors who had no credit.

5. Libertarian principles argue for allowing the banks to collapse. But wanting one’s principles to be vindicated at the cost of millions of unemployed, is, to say the least, exactly the world-view that socialists rely upon to spread their religion. The pragamtic libertarian will want to save the economic system that was abused by government, by requiring that government learn its decisive role in the debacle. Don’t hold your breath waiting for such wisdom to be included in the final agreed-upon terms of the bailout.

Don’t make nonsense claims like you know what you are talking about. Thats not what will happen. And the bailout makes things worse. The way to do it is simply increase monetary base and let all these debts be wiped from the slate via bankruptcy.

Its not a question of the bailout being a cure because you don’t know the cure. The bailout is no cure at all. How can the bailout help? It can’t help even a little bit. Its harmful just like Paulsons stimulus package and his other bailouts. He’s a walking menace like Hoover was. Bear in mind that Hoover was an immensely competent man in the private sector. But he got the wrong idea about monetary economics and so he cocked it all up. And everything Paulson is touching is turning to shiite.

The American economy needs to go through what is known as cash-building deflation.

Thats where the Feds provide extra cash and yet spending falls or at the very least its rate of growth falls. We try and get people to build their cash balances and reduce their debts via savings or bankruptcy. Both are good. Since both lead people to a place where they are ready to deal with an economy where the money supply grows only very slowly.

You want to end up with higher cash balances, less debt, and a trade surplus. Thats what a recession is supposed to do. Wring out the debt and force people back to higher cash balances and less debt. The government can reduce the time period of the cash-building deflation. But if they try and bail people out thats not an unethical solution. Its no bloody solution at all.

Its not doing something rotten for a worthy cause. Its doing the wrong policy that will be ineffectual and counter-productive. The key is to know what a recovering post-recession economy looks like and to get their fast. And it looks like a place with a trade surplus, less debt, higher cash balances, and lower asset prices.

Now supposing if you have only $5 of cash for $100 of ponzi money. And you want peoples cash balances to be three times higher in relation to their income and for there to be $40 cash for every $100 of ponzi-money. Well you could get there via cash-building deflation but it would take you 20 years.

So the goal of getting to high cash balances, lower debt levels, less ponzi-money and less debt cannot be achieved by this bailout. This bailout is running in the opposite direction. Its increasing debt. Its choosing to specifically get in the way of the liquidation of debt. Its not increasing cash levels although they are doing that on the sly. Its not getting you from A to B. From unhealthy to healthy.

So you want cash-building deflation where the government in pumping in just enough cash to allow people to pay off debts. You want to find every cut in spending you can. You want people hoarding cash, building up cash balances. And you want a lot of people selling their assets and declaring bankruptcy and walking away from their debt. Like if our houses were going to be slashed in price by two thirds you would want people like me to just be able to walk away. My house is doing fine but you get the picture.

The system has been cleaned when people carry higher cash balances, have less debt, are running a trade surplus, are saving more of their income and so forth. And the bailout isn’t an unethical solution. It is no solution. It runs in the opposite direction to the solution.

You can reduce the time period of the cash-building deflation but thats all you can do. You cannot avoid it entirely if you want to get to that place where the economy can grow fast even though the money supply is growing slowly.

No you have no idea duoist. And you are not a libertarian so forget that nonsense. There is not enough cash for the level of ponzi-money and debt around. Thats the basic imbalance right there.

There needs to be less debt and ponzi-money and a great deal more cash. You are claiming that there needs to be more credit. That means more debt. So its a case of WRONG-WAY-CORRIGAN on your part. And thats what happens in these emergencies. People start going in exactly the opposite direction of what is required. Like they burn corn for fuel. Start paying farmers to kill their pigs and not sell the meat. Start trying to hold wages up and so forth.

So no we don’t need more credit. A post-recession economy on the old gold standard would hit recovery with higher savings rates, trade in surplus, higher relative cash balances and lower debt levels. This is the combination that will allow an economy to grow without having to have the money supply growing.

So no you don’t need more credit since more credit means more debt so you are wrong. You need greater cash levels in relation to the debt we have.

We want MO way up M1 up but only when we see that the demand for cash for holding is up since we don’t want to cause inflation. We want debt down, savings up, lots of bankruptcies and liquidations to wipe the slate clear.

Precisely. The problem is that there is too much ponzi-money in relation to cash. Too much debt in relation to the money supply.

In a slow money growth world you save more, have less debt, and hold higher cash balances. So thats the adjustments that need to be paid.

They are increasing cash balances. But they are also spewing red ink all over the place. Extra cash cannot be both deflationary and inflationary at the same time Cambria so don’t even try that bullshit on for starters.

Cash will only be inflationary if the banks pyramid on top of it. So an RAR is certainly appropriate here. There is never an excuse for bailouts or for red ink. They ought to be thinking financial triage. But there is an excuse for more cash to stop the money supply from imploding. They are doing this. And this is the only useful thing that they are doing. The bailout is useless. Its worse than useless. Its in the opposite direction from the adaptations that need to be made.

But I know what you are going to do. You are going to try and say more cash and paying down debts is deflationary. But elsewhere you will claim its inflationary. You’ve made the contradictory claim both ways on this very thread.

There is a $700 billion hole. Rearranging who the debtors are doesn’t solve the problem. How exactly does propping up failed businesses and failed regulations (non discrimination in lending) “protect” you from recessions?

The world will not collapes if the US does not give in to industry lobbying. It hasn’t already, and no money has been given out.

If they do give the money out, they might end up like Japan in the 1990s.

Exactly right good work. The idea is for everyone to try and reduce their debts. And the government is not different in this respect. They cannot get in the way of mass-sackings in the banking industry.

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